Tax-Free Childcare Scheme

The launch of the Government childcare scheme is finally here and, after some delay, the scheme will take effect on 28 April 2017.

Rolled out gradually during the year, parents with children under the age of two will be eligible to join first. The scheme is referred to as tax-free childcare, as the Government will top up 20% of parents’ contributions, the equivalent of basic rate tax. Of course, there is always a caveat!  The maximum pot is £10,000 per year, per child.  The Government will contribute a maximum of £2,000 per year, per child, or £4,000 per year for children with disabilities. Both parents will also need to earn a minimum of £120 per week each, and no more than £100,000 per annum to use the scheme.

It will work in a similar way to childcare vouchers. Parents will create an account via the GOV.UK website to make payments and set up childcare providers. Childcare providers will need to be Ofsted registered.

The main benefits are that it is more flexible than traditional childcare vouchers and it will be open to all employees, regardless of whether the employer offers vouchers, as well as the self-employed.  Payments are not taken from salary so parents can stop and start payments when they want and other family members can contribute if they wish. Funds can also be withdrawn (the Government will re-claim its contribution as well).  Finally, the Government contributions are available per child.

For those that do have access to childcare vouchers, there are some benefits. By using salary sacrifice, you will also save NI contributions and, if relevant, student loan deductions, so could be better off and there are no earning restrictions. The Government scheme is available for children up to the age of 12, or 17 if the child has a disability. Childcare vouchers can be used up to the September after a child’s 15th birthday, or 16 if disabled.  However, childcare vouchers are capped and this does not increase dependant on the number of children.

Childcare vouchers will eventually be phased out but schemes will still be open to new entrants up to April 2018.

Initiatives such as this are designed to enable more parents to return or remain in work. It may be a good opportunity to review your family-friendly policies to ensure you retain your employees with children.